How a Mastercard credit card transaction works |

How does a Mastercard credit card transaction work?

The processes involved in paying with a Mastercard, explained.

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Unless you’ve been living under a rock, chances are you’ve heard of Mastercard. But other than a name on a piece of plastic in your wallet, how much do you really understand about the company?

For starters, Mastercard is a global brand of credit, debit and prepaid cards that provides the technology and network required to facilitate transactions. It is neither a bank/other financial institution that issues cards, nor does it accept transactions. So, how exactly does Mastercard work?

When you buy something using a Mastercard, several processes happen in the time between the purchase being made and the transaction showing up in your account (or on your statement). This guide will look at the different steps involved, the role that Mastercard plays and how Mastercard makes money.

What’s the difference between Mastercard debit card and credit card payments?

The main difference between how debit and credit card transactions work is that money from a debit card is taken from your personal bank account, whereas money from a credit card is lent to you by a company.

As well as that, there is a difference in the way the payments are processed – but it depends on how you pay.

When you use a debit card, if you select “Cheque” or “Savings” when prompted, your payment will be processed by EFTPOS rather than Mastercard. When you use a credit card, the payment is always processed through the Mastercard system.

However, contactless payments, regardless of whether they are made with a credit card or a debit card, are processed through the credit card system (Mastercard).

What happens when you pay with a Mastercard?

What you probably see when you pay with a Mastercard as a customer is the payment terminal or online shopping cart. But behind the scenes, there are three key roles that play a part in the transaction process:

  • Merchant bank/acquirer. This is the establishment that is licensed by Mastercard to accept consumer payments on behalf of the merchant. To process a Mastercard transaction, the merchant must establish a relationship with an acquirer.
  • Card issuer. The issuer is the bank, credit union, government entity, savings and loan association or retailer that issues the Mastercard to the consumer.
  • Technology and network provider. In this case, the provider is Mastercard.

When you pay with a Mastercard, you go through a process of Authorisation, Clearing and Settlement:




The following steps occur when a payment is being authorised. While it happens instantly, there is a lot of information exchanged within this process:

  1. The customer pays for their goods/services using a Mastercard credit card, debit card or prepaid card at a merchant EFTPOS (electronic funds transfer at point of sale) system.
  2. The Mastercard’s security features are checked by the Mastercard authorisation system and securely sent for approval to the customer’s bank.
  3. Approval is then sent by Mastercard to the merchant's bank and to the merchant.
Clearing is usually accomplished within one day and follows three steps:

  1. The Mastercard network receives the purchase information sent to them from the merchant's bank.
  2. The information is validated by the Mastercard clearing system, which then sends this purchase information over to the customer’s bank.
  3. Data is then prepared for the cardholder's statement.
Settlement of the purchase usually occurs within two days:

  1. Payment is sent from the cardholder's bank to the Mastercard network.
  2. Payment is sent from the Mastercard network to the merchant's bank.
  3. The merchant is paid by the merchant's bank for the customer’s transaction.

Does Mastercard charge any fees?

Mastercard does not charge cardholders a fee for using its network.

However, merchant banks/acquirers do pay a fee to card issuers for the benefit of being able to offer electronic payments. This fee is known as an “interchange” fee. This is then charged to the merchant in the form of a merchant discount rate.

While this fee is not charged to the consumer directly, some merchants may choose to offset this fee by applying a surcharge to your card transactions. While usually limited to 1% or 2% of the transaction amount, surcharges will vary depending on the nature of the transaction and the merchant in question.

Some banks or card providers may also charge you fees for using your credit or debit card. However, these fees are unrelated to Mastercard.

So, how does Mastercard make its money?

Mastercard makes money by charging fees to banks and other financial institutions that issue cards with the Mastercard brand. While many of these fees are relatively small, because of Mastercard’s large global presence, they add up considerably. In fact, Mastercard’s gross net revenue was US$16.9 billion for the 2019 financial year and this is expected to continue increasing.

Mastercard typically charges the following fees:

  • Gross dollar volume fee. A fee based on the gross dollar volume (GDV) of account holder activity.
  • Domestic assessments. These are fees charged to cardholders’ and merchants’ financial institutions for domestic transactions.
  • Cross-border volume fees. These are fees charged to cardholders’ and merchants’ financial institutions for international transactions.
  • Transaction processing fees. These are fees charged to merchants’ financial institutions for participating in the Mastercard network and for every transaction that’s approved.

In most cases, the main relationship you’ll have with Mastercard (as a shopper) is through your bank or credit card provider. All of these other processes will simply happen in the background.

If you’re interested in getting a Mastercard, you can learn more about Mastercard credit cards in this guide or compare both Mastercard and Visa debit cards here.

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